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A New High -- For The Trade Deficit
The U.S. Trade Deficit Hit $69.9 Billion, As Imports Of Industrial Supplies And Oil Outstripped Robust U.S. Export Growth


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On a day that the Dow Jones industrial average set a record high, so did another number closely watched by Wall Street: The U.S. trade deficit widened to an all-time high of $69.9 billion in August, according to a government report released on Oct. 12. The figure was well above economists' median forecast of a $66.6 billion deficit. But with the recent pullback in energy prices, trade reports in subsequent months should reverse this recent trend of deterioration.

The wider-than-expected trade deficit has prompted a modest downward adjustment in Action Economics' third-quarter gross domestic product estimate, to 2.5%, though our fourth-quarter forecast has been raised to 3.4%. Generally, the trade report revealed continued robust growth in U.S. exports, but a sharp overshoot in imports of industrial supplies and materials. This mix will subtract from third-quarter GDP, but it bodes well for the trajectory of U.S. aggregate demand.

Exports in August rebounded 2.3% following the unexpected 1.3% decline in July, and were largely in line with expectations. Imports rose 2.4% following the 0.9% July gain.

SEPTEMBER LETUP SEEN.

The trade-deficit surprise in August was to a large degree a petroleum story, as prices overshot our guess, with a 2.0% monthly gain. Meanwhile, oil import volume, at 14.5 million barrels per day, sharply exceeded the 14.0 million figure we thought was signaled by the weekly American Petroleum Institute data. The price pop in August for this component will likely be followed with a hefty 14% drop in September, and we expect import volume to drop back in September as well, to only a 13.4 million barrel-per-day rate. The August update suggests that net exports will subtract $16 billion in the third-quarter GDP report, following the $12.4 billion net addition in the second.

More generally, imports of industrial supplies in August exceeded our estimates, even without the petroleum swing. This may reflect a similar price and volume pattern in other, non-oil, commodity markets. In particular, a surge in demand may have boosted both volume and price for a wide range of commodities in August, followed by a letup in September that contributed to the observed correction in commodity prices.

We now assume a $62 billion trade deficit in September, and an average deficit of $60 billion in the three months of the fourth quarter. Though this may sound like an overly aggressive drop in the next two monthly forecasts, it reflects the sharp commodity price correction, and incorporates continued solid real growth in both exports and imports through the third and fourth quarters. The petroleum import figures alone will likely drop back by $6 billion in the month of September alone.

More generally, the growth path for both real exports and real imports remains robust, which is a good sign for the U.S. economy in the fourth quarter and beyond. We continue to expect export growth to outpace import growth in real terms, as global growth remains strong while the U.S. economy posts a modest slowdown in inflation-adjusted growth, to the 3%-3.5% range.

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